The insurance network

Insurtech Review | May 2019
Technology may be fundamentally altering the landscape of insurance – but, argues Ryan Rugg, Global Head of Insurance at enterprise software firm R3, these advancements are nothing without solid foundations.
Blockchain, AI, telematics, IoT – the list of technologies currently converging to transform the global insurance industry continues to grow. The breakneck pace at which this traditionally conservative sector is evolving is nothing short of breathtaking. But no matter how radical the advances in technology, there are certain underlying principles that remain critical to success. Chief among these is the ever-important network effect.
Take, for example, recent news of the creation of a blockchain-driven risk and capital exchange for the insurance market in Bermuda. This is a huge step forward for the industry, promising to cut frictional costs and allow brokers, reinsurance and insurance companies access to the capital markets using blockchain for the first time. 
Once established in Bermuda, it has clear applicability to the rest of the global insurance market, ultimately enabling market participants, brokers and risk carriers to develop and market new, competitive products and significantly extend their distribution reach.
But how can these end-state benefits be achieved? While worlds apart in terms of technology and sophistication, the success of such an exchange hinges on some of the same variables as the very first insurance market over 300 years ago. 
A common thread through history
As anyone in this industry will know, its history dates back to the 17th and 18th Centuries, when Lloyd’s Coffee House was a significant meeting place in London for sailors, merchants and shipowners. The proprietor, Edward Lloyd, catered to these groups by providing reliable shipping news, and over time the coffee shop became the centre of gravity for the shipping industry to discuss maritime insurance, shipbroking and foreign trade. This ultimately led to the establishment of the insurance market Lloyd’s of London, Lloyd’s Register and several related shipping and insurance businesses.
In order to build a successful blockchain-based exchange, it must first attract the network it seeks to support
The success of Edward Lloyd’s insurance empire was built almost entirely upon the coffee shop’s reputation as a venue where the various groups involved in the global shipping trade could be sure they could meet other parties with which they wanted to do business. This same sentiment holds true when we consider what the insurance market of tomorrow might look like. In order to build a successful blockchain-based exchange, it must first attract the network it seeks to support. 
As blockchain technology matures and consolidates, multiple groups and ecosystems are coming together on the most appropriate platforms in order to effect change and form standards, and the trend itself is self-reinforcing. As ‘Metcalfe’s Law’ states, the value of a network is proportional to the number of connections in the network squared – the more insurers that build upon on a common platform, the more valuable the platform becomes to all participants due to the inherent interoperability.
Contract placement on the blockchain
To best illustrate the importance of the network effect when deploying blockchain to overhaul an insurance function, it’s useful to examine a particular use case. Let’s take, for example, contract placement. 
This is a critical process that involves negotiating a potential insurance contract between a broker and an insurer in order to issue the insurance contract that provides coverage for an end customer. However, for most commercial and specialty insurance scenarios, this is an arduous, complex process involving several entities – a broker, one or more insurers, and potentially a reinsurer and reinsurance broker. Further, outsized risks generally mean that multiple insurers come  together to insure the risk at the requested limit price, resulting in additional complexity for the broker in managing the placement process.
Contract placement, with the extensive negotiation cycle between a broker and insurer, as well as between an insurer and reinsurer – with or without a reinsurance broker thrown in – has several inefficiencies related to firms not being adequately ‘connected’ in the same network. 
The more insurers that build upon on a common platform, the more valuable the platform becomes to all participants due to the inherent interoperability
These include extensive manual intervention and reconciliation for both brokers and insurers to keep track of requests and responses. This results in high IT spend for all participating parties in order to maintain an audit trail of the negotiation history between different entities. Additional heavy investments are also required by each firm in document storage systems to maintain separate contracts over the policy lifecycle and to ensure generated documents are tamper-proof.
The network effect generated by involving brokers, insurers and reinsurers onto the same blockchain platform can deliver major benefits to the contract placement process. With all parties connected on one platform, near instantaneous communication is possible, eliminating delays associated with reconciliation and co-ordination. 
In addition, real-time consensus on coverage, price, terms and conditions can be achieved among all parties involved in the contract, and the platform can automatically generate a complete audit trail from all sides of negotiations and data exchanges.
With all parties connected on one platform, near instantaneous communication is possible, eliminating delays associated with reconciliation and co-ordination
The benefits extend further when the platform’s network includes the regulatory community. A higher standard of regulatory compliance can be achieved across the insurance industry with instantaneous communication of in-force contracts to the regulator. The widespread ‘double spend’ problem of having the customer buy the same policy from different insurers can also be eliminated by involving the regulator. 
Building critical mass
So, the importance of attracting an extensive and diverse network to leverage the potential of a blockchain platform is clear. But how can critical mass be achieved? Ultimately, it largely boils down to technology design. Data privacy, for example, is pivotal for a network of enterprises within a highly regulated industry like insurance; after all, it must be ensured that the entire insurance supply chain of brokers, insurers, reinsurers and insureds can interact in a seamless, secure and private manner.
Unlike Edward Lloyd’s coffee house, our Corda platform – which includes data privacy as a key design element – was purpose-built from the outset for its ultimate intention: to provide businesses in industries like insurance with a blockchain platform specifically designed to help drive efficiency, cut costs and bring new products to market. However, it still relies on the same network effect that brought London’s shipping community together in that Tower Street coffee house 300 years ago. 
Insurance has always been an industry with a strong heritage and sense of tradition, and blockchain is unique in its ability to continue these traditions whilst driving the sector into the next generation of technological evolution. 
Ryan Rugg is spearheading North American business development in asset management and insurance for R3. She works closely with R3’s network of members and partners, helping drive global commercialisation and integration of the company’s Corda platform.
In 2017, she launched the Center of Excellence for Insurers and Reinsurers at R3, which is aiming to redefine the foundations of insurance by harnessing the power of collaborative networks through the deployment of blockchain technology.